Dollars and Sense: Saving for college always important

Buying a home is typically the largest investment a family will make. For those that send a child or children off to college, college expenses are usually the second-largest expense.

Larry Martin

Buying a home is typically the largest investment a family will make. For those that send a child or children off to college, college expenses are usually the second-largest expense.

Since 1990, those costs have grown considerably. For example, in 1990 a public four-year college cost about $4975 per year (tuition, fees, room and board). In 2012, those same expenses averaged about $16,789 per year.

Private college expenses were much higher. A private four-year college averaged a little over $12,000 per year in 1990.In 2012 those same expenses averaged over $33,000 per year. College expenses have increased annually at about 5 ½%, while over the same time inflation has increased around 2.75%.

Costs for a public two-year college in 1990 averaged (tuition, fees, room and board) $3299 per year. Those same expenses in 2012 averaged about $8561 per year. So with costs like that you have to ask yourself, is it worth it?

Well, the average median income of a college graduate, both male and female, is about 50% higher than their high school graduate counterparts. On the downside, student loan debt in this country is now at a whopping $1.2 trillion dollars.

According to a recent Forbes article by Chris Denhart, two thirds of all graduating students have some level of debt. The average graduating debt load is $26,600.

How about saving for college? If you wanted to put away just $25,000 (which is not enough) for one of your kids; you would have to save $72/month for 18 years (at 5% interest).Two widely used investment tools for college saving today are 529 plans and Coverdell educational savings accounts.

529 Savings PlansFederal law allows states to establish tax-advantaged savings programs to pay for students qualified higher education expenses. In these programs, contributions are made to an account established for an individual. An investment management firm typically manages the account funds. Depending on the fund, the account owner may have a range of investments that they can choose from. Contributions are not tax deductible but growth in the account is tax-deferred. Distributions used solely to pay for qualified higher education expenses are federally tax-exempt. State or local law can vary. 529 Savings Plans allow you to put a lot more money away for college however, your investment options are restricted by the plan you are in.

They are a great investment vehicle for grandparents who are looking at ways to reduce the size of their estate and/or to put away money for their grandchildren. In 2013 the annual gift tax exclusion amount is $14,000 per individual. A married couple can elect to split gifts for a total annual contribution of $28,000 per beneficiary. So, grandparents can gift $28,000 per year per beneficiary. In fact, they could even do a one time distribution of $70,000 each or $140,000 per couple for each beneficiary.

529 Pre-paid tuitions Federal law also allows states and qualifying private colleges to establish a tax advantage prepaid tuition plan. Under these plans, contributions are made into a qualified trust to prepay, at today's prices, some or all of the beneficiaries tuition costs.

Coverdell educational savings accountThese are also called educational IRAs. Just as in a 529 plan, contributions are not tax-deductible but so long as the earnings are distributed to pay qualified educational expenses, the earnings are not taxed.

Federal income tax law currently limits contributions of an educational IRA to $2000 per beneficiary per year. Contributions must be made before the beneficiary reaches age 18.

There is a contribution phase out so, for married couples making over $220,000 per year, they could not contribute to an educational IRA. The educational IRA has a wider array of authorized expenses. While the 529 plan is specifically for post secondary expenses; the educational IRA may also be used for K-12 expenses.

Lastly, you are not limited to a range of investments by an investment manager as in a 529 plan. You have a full array of investment options just like your other IRA accounts.When my three kids graduated from high school, I gave all of them pretty much the same advice.

They needed to go to college or a technical school because they needed a degree or skill to command a decent salary. If they wanted to go college, I would pay for two years at a community college where they could complete their core courses. If they were properly motivated, they could pay for their remaining two years at a four year college.

I would assist. I am a firm believer kids need to have some skin in the game when it comes to college. Of course, none of it worked out that way but from a purely cost perspective, two years at a community college and finishing your remaining years at a four year college is the best way to go.

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